Wednesday, September 20, 2006

Calls of Note Part 4

- ThinkEquity's Eddie Cheung and Eric Ross are commenting on Dell (NASDAQ:DELL) saying that while in Asia, they have heard from several members of the PC supply chain that Dell's (DELL) PC units and profitability are declining rapidly below expectations. They believe it may be possible that DELL will preannounce negatively again, likely in mid-October. Firm also believes Intel will effectively remove its marketing subsidies to Dell. They continue to believe that Dell represents the best short play in firm's Universe. Reiterates Sell rating and lowers price target from $18 to $17.

Firm expects Intel to drastically lower its marketing budget to DELL to essentially zero. Sources have suggested that Intel is in the process of reducing its marketing budget with Dell from several hundred million dollars per quarter to essentially zero. This will likely negatively impact Dell's operating margins as these marketing expenses will no longer be offset (and should improve Intel's operating expenses).

They believe it will be very difficult to make up the declines seen thus far in the October quarter. Firm would expect DELL to preannounce lower expectations in mid-October-if the company follows its past actions, it will attempt to bury its preannouncement in earnings season. Although this may seem counter-intuitive (given it provided no guidance), they note it has preannounced both of the past two quarters (without giving guidance).

Rev estimates: 3QCY06 from $14.5 billion to $14.0 billion; CY06 from $58.41 billion to $57.31 billion; CY07 from $61.5 billion to $59.5 billion. EPS: 3QCY06 from $0.23 to $0.18; CY06 from $1.10 to $0.99; CY07 from $1.20 to $1.05.

Notablecalls: Again, nice work guys! Looks like DELL may have another couple of points of downside in it. No quick fixes here.